Corporate Performance Management: Enlightened Companies Will See the Statutory Operating and Financial Review Not as a Barrier to Clear, but as a Chance to Get into a Virtuous Circle
Barrett, Richard, Financial Management (UK)
After a lull over the past few years, many organisations are upgrading their performance management systems to give them a better insight into future revenues and profitability. But there's nothing like new legislation to locus the mind: UK-listed companies will for the first time be required to prepare statutory operating and financial reviews (OFRs) for financial years starting on or after April 1, 2005.
The OFR is a narrative report intended to help shareholders and potential investors assess a company's strategies and capacity for success in the future. Companies faced by new legislation often see it merely as an obstacle to overcome. This usually leads to short-term solutions, which might meet the basic statutory requirements but will fail to take advantage of the situation and the potential returns. Firms that make this mistake will incur the costs of compliance and reap none of the rewards.
In 2003 specialist monitoring company GovernanceMetrics International found a strong link between investor-friendly governance practices and high shareholder returns. It's not hard to see why this might be the case. Compliance requirements that favour greater transparency give all stakeholders more confidence. This leads to more investment and creates a virtuous circle that increases the company's value.
Of course, none of this comes without committing the necessary resources. In particular, the right information systems and controls need to be in place. The better solutions available from corporate performance management (CPM) vendors provide several features that help to satisfy the requirements of the OFR legislation. Key among these is the ability to combine financial and non-financial information. An OFR can potentially report on many different areas. These include customer and market statistics, innovation, employee skills and (self-referentially) governance issues. Formal reporting on these topics will be new to some, but a company should ideally be managed using such measures--the drivers of its business--anyway. …